Wealth Ltd. has entered into lease agreement with a lessor for a period of 5 years at the annual lease rental of 8 lakhs. There is an option at the…

(a) (iii) In the above part (i), it was considered that lessee was reasonably certain that he will exercise the option at the end of 5th year that's why the same has been considered in determination of lease payment. Now, lessee is exercising the option at the end of 3rd year which implies that there is change in the assessment of an option to purchase the underlying asset. Hence, paras 39 and 40(b) of IFRS 16 will come into the picture which are as follows (only relevant part have been reproduced here): 39 After the commencement date, a lessee shall apply paragraphs 40–43 to remeasure the lease liability to reflect changes to the lease payments. A lessee shall recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. 40 A lessee shall remeasure the lease liability by discounting the revised lease payments using a revised discount rate, if either: (a) (b) there is a change in the assessment of an option to purchase the underlying asset, assessed considering the events and circumstances described in paragraphs 20–21 in the context of a purchase option. A lessee shall determine the revised lease payments to reflect the change in amounts payable under the purchase option. Therefore, the lease liability has to be remeasured on change in the assessment of exercising the option. Original lease liability is 60,16,278 (Working Note 1). Since at the end of the 3rd year, the lease has been terminated due to exercise of option to purchase the asset, the revised lease liability is the amount paid on exercising the option i.e.56,00,000. The difference of original lease liability and revised lease liability will decrease the carrying amount of the right-of-use asset. Accordingly, the adjustment to ROU Asset would be = 60,16,278- 56,00,000 = 4,16,278. Journal Entry Particulars (₹) (₹) Lease liability Dr. 4,16,278 To ROU Asset (Adjustment of difference in original lease liability and revised lease liability to ROU Asset) 4,16,278 PPE Dr. 21,87,562 To ROU Asset (26,03,840 (Refer W.N.2) -4,16,278) 21,87,562 (ROU Asset balance transferred to PPE on exercising of lease option) Lease Liability Dr. 56,00,000 To Bank/Lease payable (Extinguishment of lease liability) 56,00,000 Note: We have stopped till the entry to exercise the option to purchase the leased asset (as per the requirement of the question). Treatment for change in the value of PPE due to its fair value has not been considered here. Working Notes: 1. Calculation of outstanding Lease Liability at the end of 3rd year Year Opening balance (A) ₹ Interest @ 10% (B) ₹ Lease payments (C) ₹ Closing balance (A) + (B) - (C) ₹ 1 65,09,600 6,50,960 8,00,000 63,60,560 2 63,60,560 6,36,056 8,00,000 61,96,616 3 61,96,616 6,19,662 8,00,000 60,16,278 2. Calculation of ROU Asset balance at the end of 3rd year Year Opening balance (A) ₹ Depreciation (B) ₹ Closing balance (A-B) ₹ 1 65,09,600 13,01,920 52,07,680 2 52,07,680 13,01,920 39,05,760 3 39,05,760 13,01,920 26,03,840